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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Stock Noise

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As of 02/24/2017
20,822 11.44 0.1%
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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

This article discusses noise in stocks and ETFs, how to detect it, what it means, and how it can help swing traders.

 

Stock Noise Summary

Tests show that noise occurs about 47% of the time in nearly 600 stocks, and 40% of the time in 100 exchange traded funds (ETFs). The lower noise in ETFs may be due to frequent gapping, forcing price bars "clear" of any congestion region and appearing to trend more often.

Stocks and ETFs with low noise trend the most, suggesting that they represent the best trading vehicles for swing traders.

Just because a stock or ETF has low noise does not mean it trends upward or downward consistently. Frequently, you see tall swings up and down in straight-line runs.

I also found the following to be true.

  • Bull markets tend to be noisier trending up, and bear markets are noisier trending down.
  • ETFs trend more than stocks.
  • Weekly data is noisier than daily data.

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Stock Noise Background

Ron Black wrote an article in Technical Analysis of Stocks & Commodities magazine, October 2010 titled, "Using Noise." In an earlier article (September 2010, "Getting clear with short-term swings") he discussed his "Clear Method" to determine when a short-term trend changes. In the October article, he uses the Clear Method to detect noise.

The Clear Method

The Clear Method uses the lowest high and highest low to determine when two price bars do not overlap. When they no longer overlap, they are "clear" of one another, and the trend changes from up to down, or down to up.

Picture of Noise.

It's easiest to understand the Clear Method using an example. The figure above shows price moving lower in a downtrend. It bottoms in the middle of the left panel, but what's key is the high on that day. That high price is below the prior highs that formed the downtrend. It's the lowest high.

When price climbs enough so that the low is above the lowest high, then the trend has changed from down to up. In other words, the highest low is above (clears) the lowest high. I show that with a green line.

The right panel is similar only it applies to up trends. When the lowest high clears the highest low, the trend is said to change from up to down. Again, the green line shows this.

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Enter Noise

Picture of a flower from my garden.

The "Clear Method" is used to determine when noise occurs. If, in an uptrend, price makes higher lows, it is trending upward. When it stops making higher lows and before a "clear" trend change occurs, noise takes the place of the trend.

In a downtrend, price makes lower highs. When that stops happening and before a trend change from down to up occurs, noise sets in.

In the above figure, the three bars on each panel with a green line drawn through them are the noise bars. I show them in magenta.

On the left panel, the three magenta bars have highs above the clear bar, but they are not yet clear of the lowest high, so they are noise. When the highest low happens, the trend changes from down to up and noise ends.

On the right panel, the three magenta bars have lower lows than the clear bar, but they are not clear of the lowest high. They are noise bars. When the lowest high occurs, a new trend begins and noise ends.

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Stock Noise Methodology

I tested the Clear Method as if each clear bar was a buy or sell signal following these guidelines.

  • Duration: March 12, 2001 to October 1, 2010, but not all securities covered the entire period. This period showed the S&P 500 index unchanged although two bull and bear markets occurred during the duration.
  • Using 554 stocks or 88 long only ETFs.
  • Stocks below $5 at the time of purchase were excluded.
  • Commissions were $20 round trip ($10 buy and $10 sell).
  • Investment of $10,000 per trade. Profits or losses were not reinvested.
  • Buy or sell at the open the day after price goes clear.

For the noise test, I used the following.

  • Duration: March 24, 2000 (Bull market peak) to December 21, 2010. Not all stocks and ETFs covered the entire range.
  • Using 554 stocks and 88 long only ETFs.
  • Almost 1.6 million lines (price bars) used.

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Stock Noise: Clear Method Results

Ron Black did not claim that his Clear Method could be used as a stand-alone trading system. However, I tested it anyway. The following table shows the results for the Clear Method.

DescriptionAverage
Gain/Loss
Average
Max
Drawdown
Average
Max Hold
Time Loss
Win/LossAverage
Hold Time
S&P 500
Index
88 long ETFs, daily-0.2%2.6%2.8%39%10-1.9%
554 stocks, daily-0.1%4.6%4.6%37%13-1.8%
554 stocks, weekly1.6%10.4%10.1%40%69-2.1%
88 long ETFs, weekly2.0%6.6%6.7%46%73-1.5%
Short Sales Below
554 stocks, weekly-1.1%  32%55-1.8%
554 stocks, daily-0.3%  35%11-1.6%
88 long ETFs, daily -0.2%  36%8-1.6%
88 long ETFs, weekly -0.1%  30%49-2.2%

Notes:

Average gain/loss. Per trade average gain or loss, expressed as a percentage.
Average max drawdown. Maximum peak to trough drop for each trade, averaged over all trades.
Average max hold time loss. How far below the buy price the security drops during the trade, averaged.
Win/Loss. Ratio of winning trades to all trades, expressed as a percentage.
Average hold time. Average trade duration.
S&P 500 index. How the index faired for the duration of each trade, averaged over all trades.

The Clear Method works best on the weekly scale. The win/loss ratio is 46% for ETFs and 40% for stocks. Tests on daily data show ETFs winning 39% of the time and stocks winning 37% of the time (long trades only). Short sales win less often, 36% for ETFs and 35% for stocks, both using the daily scale.

The average gain for long only trades is best on the weekly scale: 1.6% per trade for stocks and 2.0% for ETFs. None of the short positions (daily or weekly, stocks or ETFs) were profitable. The table shows the drawdown and hold time loss except for short sales, which were not calculated.

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Noise Results

The following table shows how often noise occurs in stocks and ETFs.

NoiseStocksETFs
Daily data47%40%
Weekly data48%45%

ETFs have less noise than stocks, but that could be due to excessive gaps that occur in many ETFs. Price bars that gap have a tendency to "clear" sooner than those that do not gap.

Additional tests splitting the duration into bull and bear markets shows that:

  • Bull markets tend to be noisier trending up, and bear markets are noisier trending down;
  • ETFs trend more than stocks; and
  • Weekly data is noisier than daily data.

-- Thomas Bulkowski

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See Also

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Youth is when you blame all your troubles on your parents. Maturity is when you learn that everything is the fault of the younger generation.